DISCUSSION
22 The present application is made both by liquidators and receivers of an unregistered managed investment scheme. It relates to an agreement which might operate for more than three months so approval of the liquidators' entry into it is governed by s 477(2B) of the Act. Approval of the receivers' entry into the agreement is sought under s 601EE(2).
23 In Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375, Gordon J summarised the principles relevant to curial approval under s 477(2B) of the Act at [26] as follows:
(1) the court does not simply "rubber stamp" whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims:
[T]he Court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.
(2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647;
(3) the role of the Court is to grant or deny approval to the liquidator's proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642;
(4) in reviewing the liquidator's proposal, the task of the Court is:
[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in … a hearing de novo [but] … simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the "expeditious and beneficial administration" of the winding up.
See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 at [60]. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter;
(5) further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a "grossly excessive profit": Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 at [28];
(6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein.
24 In Mier v FN Management Pty Ltd [2006] 1 Qd R 339, Keane JA discussed s 601EE(2) at 347-348 as follows:
It follows, in my view, that where a statute makes reference, without more, to the "winding up" of an entity, it is referring to the application of a procedure containing these essential characteristics. It follows that s. 601EE(2) must be read as empowering a court to make such orders as it considers appropriate in order to apply such a procedure to an unregistered managed investment scheme. It may also be accepted that the terms of the section allow for further orders to be made as needed so long as they are required for the "due conduct and completion of the winding up". The necessary corollary is that an order that could not reasonably be seen as advancing this procedure would not be authorised by s. 601EE(2). The comprehensive survey of authority undertaken by White J. in Re Stacks Managed Investments Ltd shows that courts have used the power granted by s. 601EE to appoint persons to act as receivers, managers or liquidators with powers commensurate with those that would be possessed by persons fulfilling similar roles in the winding up of a company.
(footnotes omitted)
25 In the present case, the funding agreement is, unusually, made both on the one part and on the other part by the same persons, the applicants, albeit in their different capacities respectively. Any assets recovered in the liquidation of WRVM (which has the standing to pursue the proposed claims) are payable to the Mews fund, on which investors represented by Mr Warne are now the only claimants. The Mews fund will bear the cost of funding the litigation, but will also be the sole beneficiary of any successful recovery.
26 The seventh defendant was excused from appearing at the hearing of the application, but supported the application, subject to an expression of concern that the litigation should not unduly deplete the Mews fund. The seventh defendant accordingly advocated that, as the amount currently in the Mews fund greatly exceeded the estimated costs of the litigation, the receivers should promptly apply to make an interim distribution, and submitted that the applicants should satisfy the court there were sufficient grounds to anticipate that any judgment would be satisfied.
27 Before me, counsel for the applicants stated that they intended to apply for approval of an interim distribution in about six weeks from the date of the order. Counsel also informed the court that the applicants had investigated the resources of the principal prospective defendant as fully as was feasible in the current circumstances, and further investigation was anticipated after the commencement of litigation.
28 Having read the confidential memorandum of advice of Blake Dawson dated 24 March 2011, I was satisfied that, having regard to the liquidators' commercial judgment and their knowledge of the circumstances of the liquidation; the legal advice they had obtained as to the nature, value and recovery of the claims in question; and the absence of any indication of bad faith, impropriety, legal error, or any disproportionate benefit to the entity providing funding; the liquidators' entry into the funding agreement should be approved pursuant to s 477(2B) of the Act, to facilitate the realisation of the company's assets and payment of its liabilities, thereby advancing its expeditious and beneficial winding up.
29 I was likewise satisfied that the entry into the funding agreement by the Mews receivers should also be approved pursuant to s 601EE(2) of the Act, in circumstances where: the proposed litigation had the potential significantly to increase the assets of the Mews fund (on which the investors represented by Mr Warne are now the only claimants); a capped amount will be provided in the first instance and any application for further funding will be made only on notice; a prompt application by the Mews receivers for approval of an interim distribution to investors was foreshadowed; the funding agreement was, in the commercial judgment of the Mews receivers (fortified by legal advice) appropriate; the capacity of the prospective defendants had been investigated to the extent feasible at this stage and there was no reason to believe that a principal prospective defendant would be unable to satisfy a judgment; appropriate safeguards were in place; the level of risk involved was outweighed by the prospects and magnitude of the prospective benefits; and the funding agreement had the potential to get in and distribute significantly greater funds to the investors, thus advancing the due conduct and beneficial completion of the winding up of the Mews Scheme.
I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dodds-Streeton.